Quarterly report pursuant to Section 13 or 15(d)

Note 6 - Stock-based Compensation

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Note 6 - Stock-based Compensation
 9 Months Ended
Dec. 30, 2012
Disclosure of Compensation Related Costs, Share-based Payments [Text Block]
Note 6 – Stock-based Compensation

The Company has adopted an incentive stock plan (the “Plan”) that is intended to attract and retain directors, officers and employees of the Company and to motivate these individuals to achieve the overall goal of increasing stockholder value.  The Plan was adopted to ensure that the Company has a mechanism for long-term, equity-based incentive compensation for directors, officers and employees.  Awards granted under the Plan may be in the form of qualified or non-qualified stock options, restricted stock, stock appreciation rights, long-term incentive compensation units consisting of a combination of cash and shares of the Company’s common stock, or any combination thereof within the limitations set forth in the Plan.  The Plan is administered by the compensation committee of the Company’s Board of Directors (the “Board”), which selects eligible employees and non-employee directors to participate in the Plan and determines the type, amount, duration and other terms of individual awards.  At December 30, 2012, 508,750 shares of the Company’s common stock were available for future issuance under the Plan.

Stock-based compensation is calculated according to FASB ASC Topic 718, Compensation – Stock Compensation, which requires stock-based compensation to be accounted for using a fair-value-based measurement.  The Company recorded $242,000 and $530,000 of stock-based compensation expense during the three and nine months ended December 30, 2012, respectively, and recorded $128,000 and $415,000 of stock-based compensation expense during the three and nine months ended January 1, 2012, respectively.  The Company records the compensation expense related to stock-based awards granted to individuals in the same expense classifications as the cash compensation paid to those same individuals.  No stock-based compensation costs have been capitalized as part of the cost of an asset as of December 30, 2012.

Stock Options: The following table represents stock option activity for the nine-month periods ended December 30, 2012 and January 1, 2012:

   
Nine-Month Period Ended December 30, 2012
   
Nine-Month Period Ended January 1, 2012
 
   
Weighted-Average
Exercise Price
   
Number of Options
Outstanding
   
Weighted-Average
Exercise Price
   
Number of Options
Outstanding
 
Outstanding at Beginning of Period
  $ 3.57       573,000     $ 3.31       747,000  
Granted
    5.42       110,000       4.81       100,000  
Exercised
    3.46       (521,750 )     3.20       (196,500 )
Forfeited
    0.71       (1,250 )     -       -  
Outstanding at End of Period
    5.23       160,000       3.57       650,500  
Exercisable at End of Period
    -       -       3.26       500,500  

The total intrinsic value of the stock options exercised was $443,000 and $1.2 million during the three and nine-month periods ended December 30, 2012, respectively, and was $8,000 and $340,000 during the three and nine-month periods ended January 1, 2012, respectively.  As of December 30, 2012, the intrinsic value of the outstanding stock options was $3,000.

The Company received cash in the amount of $98,000 and $29,000 from the exercise of stock options during the nine months ended December 30, 2012 and January 1, 2012, respectively.  Upon the exercise of stock options, participants may choose to surrender to the Company those shares from the option exercise necessary to satisfy the exercise amount and their income tax withholding obligations that arise from the option exercise.  The effect on the cash flow of the Company from these “cashless” option exercises is that the Company remits cash on behalf of the participant to satisfy his or her income tax withholding obligations.  The Company used cash of $437,000 and $137,000 to remit the required income tax withholding amounts from “cashless” option exercises during the nine months ended December 30, 2012 and January 1, 2012, respectively.  The Company’s net outflow of cash upon the exercise of stock options was $339,000 and $108,000 during the nine months ended December 30, 2012 and January 1, 2012, respectively.

To determine the estimated fair value of stock options granted, the Company uses the Black-Scholes-Merton valuation formula, which is a closed-form model that uses an equation to estimate fair value.  The following table sets forth the assumptions used to determine the fair value, and the resulting grant-date fair value per option, of the non-qualified stock options which were awarded to certain employees during the nine months ended December 30, 2012 and January 1, 2012, which options vest over a two-year period, assuming continued service.

   
Nine-Month Periods Ended
 
   
December 30, 2012
   
January 1, 2012
 
Options issued
    110,000       100,000  
Grant Date
 
June 13, 2012
   
June 10, 2011
 
Dividend yield
    5.90 %     2.49 %
Expected volatility
    65.00 %     60.00 %
Risk free interest rate
    0.55 %     1.84 %
Contractual term (years)
    10.00       10.00  
Expected term (years)
    4.00       5.75  
Forfeiture rate
    5.00 %     5.00 %
Exercise price (grant-date closing price)
  $ 5.42     $ 4.81  
Fair value
  $ 1.84     $ 2.16  

Although the Company’s historical stock option exercise experience provided a reasonable basis upon which to estimate the expected term for the stock options granted during the nine-month period ended December 30, 2012, that was not the case for the stock options granted during the nine-month period ended January 1, 2012.  In that period, the Company elected to use the simplified method to estimate the expected term of the stock options granted, as allowed by SEC Staff Accounting Bulletin No. 107 and the continued acceptance of the simplified method indicated in SEC Staff Accounting Bulletin No. 110.

For the three and nine-month periods ended December 30, 2012, the Company recognized compensation expense associated with stock options as follows (in thousands):

   
Three-Month Period
   
Nine-Month Period
 
Options Granted in Fiscal Year
 
Cost of
Products
Sold
   
Marketing &
Administrative
Expenses
   
Total
Expense
   
Cost of
Products
Sold
   
Marketing &
Administrative
Expenses
   
Total
Expense
 
2011
  $ -     $ -     $ -     $ 14     $ 13     $ 27  
2012
    12       12       24       41       41       82  
2013
    11       13       24       24       28       52  
                                                 
Total stock option compensation
  $ 23     $ 25     $ 48     $ 79     $ 82     $ 161  

For the three and nine-month periods ended January 1, 2012, the Company recognized compensation expense associated with stock options as follows (in thousands):

   
Three-Month Period
   
Nine-Month Period
 
Options Granted in Fiscal Year
 
Cost of
Products
Sold
   
Marketing &
Administrative
Expenses
   
Total
Expense
   
Cost of
Products
Sold
   
Marketing &
Administrative
Expenses
   
Total
Expense
 
2010
  $ -     $ -     $ -     $ 15     $ 33     $ 48  
2011
    11       11       22       36       37       73  
2012
    12       12       24       28       27       55  
                                                 
Total stock option compensation
  $ 23     $ 23     $ 46     $ 79     $ 97     $ 176  

As of December 30, 2012, total unrecognized stock option compensation expense amounted to $203,000, which will be recognized as the underlying stock options vest over a weighted-average period of 9.5 months.  The amount of future stock option compensation expense could be affected by any future stock option grants and by the separation from the Company of any individual who has received stock options that are unvested as of such individual’s separation date.

Non-vested Stock:  The Board granted 42,000 shares of non-vested stock with a fair value of $5.62 per share to the Company’s non-employee directors during the three-month period ended September 30, 2012 and granted 30,000 shares of non-vested stock to the Company’s non-employee directors during each of the three-month periods ended October 2, 2011, September 26, 2010 and September 27, 2009, with a weighted-average fair value per share of $4.44, $4.36 and $3.02, respectively.  These shares vest over a two-year period, assuming continued service. The fair value of the shares was determined based on the number of shares granted multiplied by the closing price of the Company’s common stock on the date of the grant.

During the three-month period ended June 27, 2010, the Board awarded 345,000 shares of non-vested stock in a series of three grants to each of certain employees.  Pursuant to its terms, each such grant will vest if both (i) the closing price per share of the Company’s common stock is at or above target levels of $5.00, $6.00 and $7.00, respectively, for any ten trading days out of any period of thirty consecutive trading days and (ii) the respective employee remains employed through July 29, 2015.  The Company, with the assistance of an independent third party, determined that the aggregate grant date fair value of the employee awards amounted to $1.2 million.

On November 30, 2012, the Board approved an amendment to the grant subject to the $5.00 per share closing price condition that had been awarded to E. Randall Chestnut, Chairman, Chief Executive Officer and President of the Company.  With the closing price condition having been met for this award, the grant was amended to provide for the immediate vesting of 62,000 of the 75,000 shares awarded in order to preserve the deductibility of the associated compensation expense by the Company for income tax purposes.  As a result of the acceleration of the vesting, the Company recognized the remaining compensation expense associated with the 62,000 shares vested of $99,000 during the three and nine-month periods ended December 30, 2012, which amount would otherwise have been recognized by the Company ratably through July 29, 2015.  To satisfy the income tax withholding obligations that arose from the vesting of the shares, Mr. Chestnut surrendered 26,319 shares to the Company, and the Company paid $153,000 to the appropriate taxing authorities on his behalf.

For the three and nine-month periods ended December 30, 2012, the Company recognized compensation expense associated with non-vested stock grants, which is included in marketing and administrative expenses in the accompanying consolidated statements of income, as follows (in thousands):

   
Three-Month Period
   
Nine-Month Period
 
Stock Granted in Fiscal Year
 
Employees
   
Non-employee
Directors
   
Total
Expense
   
Employees
   
Non-employee
Directors
   
Total
Expense
 
2011
  $ 148     $ -     $ 148     $ 252     $ 18     $ 270  
2012
    -       17       17       -       50       50  
2013
    -       29       29       -       49       49  
                                                 
Total stock grant compensation
  $ 148     $ 46     $ 194     $ 252     $ 117     $ 369  

For the three and nine-month periods ended January 1, 2012, the Company recognized compensation expense associated with non-vested stock grants, which is included in marketing and administrative expenses in the accompanying consolidated statements of income, as follows (in thousands):

   
Three-Month Period
   
Nine-Month Period
 
Stock Granted in Fiscal Year
 
Employees
   
Non-employee
Directors
   
Total
Expense
   
Employees
   
Non-employee
Directors
   
Total
Expense
 
2010
  $ -     $ -     $ -     $ -     $ 11     $ 11  
2011
    52       13       65       156       44       200  
2012
    -       17       17       -       28       28  
                                                 
Total stock grant compensation
  $ 52     $ 30     $ 82     $ 156     $ 83     $ 239  

As of December 30, 2012, total unrecognized compensation expense related to the Company’s non-vested stock grants was $668,000, which will be recognized over the respective vesting terms associated with each block of grants as indicated above, such grants having an aggregate weighted-average vesting term of 2.2 years.  The amount of future compensation expense related to the Company’s non-vested stock grants could be affected by any future non-vested stock grants and by the separation from the Company of any individual who has received non-vested stock grants that remain non-vested as of such individual’s separation date.